Recently, Polish investment funds have become more frequently used in international tax planning. Pursuant to Article 6.1.10 of the 1992 Polish Corporate Income Tax Law, all investment funds established and operating based upon the 2004 Investment Funds Law are fully exempt from corporate income tax. Such an exemption is consistent with the general idea of an investment fund being a “tax-neutral” entity, which does not create any additional layer of taxation. Thus, income of any kind, including dividends or capital gains, is not taxable at the fund’s level. Such income would become taxable only at the investor’s level, i.e., owner of the participation units in open-ended investment funds or investment certificates in closed-ended funds.
From this perspective an interesting feature is a closed-ended fund (so-called FIZ), which issues investment certificates. Income from redemption or sale of such investment certificates constitutes capital gain. Pursuant to Article 13 of a typical bilateral double taxation treaty, based upon the OECD Model Convention on Income and on Capital, capital gains shall be taxable, with some minor exceptions regarding capital gains made on disposition of real estate; movable property of a permanent establishment, or vehicles operated in international transport, shall be taxable only in the state of residency of the seller. As a consequence, a diligent selection of a jurisdiction in which an investor in a closed-ended fund is located may result in a significant reduction or full elimination of income taxation. This might be particularly interesting in cases in which the shareholding of a non-Polish investor in a Polish target company is lower than the minimum threshold required under the EU Parent-Subsidiary Directive for a full exemption from withholding tax on dividends in the source country. A direct payment of dividends from a Polish target to such investor would not qualify for an exemption from withholding tax, otherwise levied at a 19 percent rate (or at a lower rate resulting from a respective bilateral double taxation treaty), while a diligent use of a residence jurisdiction and Polish closed-ended investment funds may result in a full exemption.